1984 (7) TMI 59 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 41(2) of the Income-tax Act, 1961.
2. Legal effect of the insurer's option to reinstate under a policy of aviation insurance.
3. Interpretation of "moneys payable" under Section 41(2) of the Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(2) of the Income-tax Act, 1961:

The primary issue in this case is whether the exercise of an option by the insurance company to replace a damaged aircraft with another aircraft of the same make and type attracts the application of Section 41(2) of the Income-tax Act, 1961. The Income Tax Officer (ITO) assessed profits under Section 41(2) by viewing the transaction as a purchase of a new aircraft by the insurance company on behalf of the assessee. The Appellate Assistant Commissioner (AAC) upheld this view, stating that "money payable" includes any amount received from an insurance company. The Tribunal also upheld this view, concluding that the replacement of the aircraft constituted compensation money payable for damages, thereby attracting Section 41(2).

2. Legal Effect of the Insurer's Option to Reinstate:

The court examined the legal effect of the insurer's option to reinstate under a policy of aviation insurance. It was noted that the insurance policy allowed the insurer to either pay the insured amount or replace the damaged aircraft. The court referred to authoritative texts on insurance law, including Halsbury's Laws of England, Chitty on Contracts, and MacGillivray & Parkington on Insurance Law, which uniformly state that once the insurer elects to reinstate, the contract becomes one for reinstatement ab initio. This means that the contract is treated as if it had always been one for reinstatement, and no money payment is involved.

3. Interpretation of "Moneys Payable" Under Section 41(2) of the Act:

The court held that the expression "moneys payable" under Section 41(2) of the Act cannot be applied to the replacement of the damaged aircraft. The court reasoned that the insurer's election to reinstate resulted in the discharge of liability by replacing the aircraft, not by paying money. Therefore, no money was payable or paid to the assessee, and the transaction did not attract Section 41(2). The court rejected the Revenue's argument that the replacement should be viewed as a discharge of liability for payment of money.

Conclusion:

The court concluded that the exercise of the option by the insurer to reinstate the damaged aircraft did not result in any assessable profit under Section 41(2) of the Income-tax Act, 1961. The question of law was answered in the negative and against the Revenue. The assessee was entitled to the costs of the reference, and the Revenue's oral application for leave to appeal to the Supreme Court was rejected.